Lecture 22 - Lecture 22: Profit Maximization Demand Curve...

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Lecture 22: Profit Maximization Demand Curve Facing the Firm We assume that firms choose the price and quantity produced so as to maximize profits. A firm's choices for the price and quantity produced depend on the environment in which it operates. One important factor is the demand curve facing the firm. With perfectly elastic demand the firm has no control over price. It only chooses the quantity to produce. A firm facing a downward sloping demand curve chooses both the price and quantity produced so as to maximize profits. Facing a perfectly inelastic demand curve, the firm only chooses the price since the quantity is determined by how much consumers want. Firms would prefer to face the most inelastic demand curves possible. Firms can reduce elasticity by reducing the availability of substitutes. One way is to distinguish or differentiate your product from those of your competitors. Differentiation can occur through advertising, price, service, quality, location, et cetera. Barriers to Entry A firm's environment not only depends on the demand for its product but also on the ease of entry into the market. A barrier to entry is anything that makes it difficult or costly for a firm to enter a market. Some
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This note was uploaded on 03/21/2012 for the course ECO ECO2023 taught by Professor Hermbaine during the Winter '09 term at Broward College.

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Lecture 22 - Lecture 22: Profit Maximization Demand Curve...

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